Sunshine sector loses sheen as foreign competition looms

Going solar is no longer a bright idea for the four-decade-old photovoltaic manufacturing industry. This high-potential renewable energy sector has suffered a serious setback in India as much as across the globe. And the alarm bells are ringing loud.

In the 1970s, public sector companies Bharat Heavy Electrical Limited and the Central Electronics Limited were the first to make solar equipment in India. But these were primarily for research and development. In the 1990s, some more companies started small-scale manufacture of solar equipment. These were restricted to manufacturing for household applications. It was in 2006-07 that Moser Baer, an optical storage media manufacturer, set up the first commercial-scale manufacturing plant of 40 megawatt (Mw) capacity. This was to make solar cells, an electrical device that converts light energy into electricity.

The industry got the much-needed push from the ambitious Jawaharlal Nehru National Solar Mission (JNNSM), which aims to achieve 22,000 Mw solar energy generation by 2022. The growing global demand led to mushrooming of domestic players. The cell manufacturing industry, that was mostly export-oriented and catered to the European market, started aggressive manufacturing anticipating a huge domestic demand coupled with the biggest ever increase in global demand for solar photovoltaic. India now has an installed manufacturing capacity of 2,000 Mw for solar modules and 900 Mw for solar cells. Nineteen cell makers are registered with the Ministry of New and Renewable Energy (MNRE). The country has more than 50 module makers.

But despite the good start, the entire solar manufacturing sector is in a state of collapse. More than 80 per cent of the units in India are closed. What went wrong?

The solar manufacturing sector, say analysts, followed the most optimistic projections for future orders and created a huge overcapacity build-up. Post-2004, after the feed-in-tariffs were announced in Germany, the industry went into an overdrive. Feed-in-tariff is the high rate that the government gives developers to promote clean but expensive energy.

In the global solar photovoltaic demand, the biggest jump happened in 2010. From a little over 7,000 Mw in 2009, the demand shot up to close to 20,000 Mw in 2010. This is when the cell manufacturing capacity increased extensively. According to estimates by Bloomberg New Energy Finance, world’s leading provider of industry information, the current global demand is about 30,000 Mw. But the manufacturing capacity is double that.

European crisis
European countries, which drove the initial investments and supported the sector with attractive policies, were the ones responsible for the industry’s downfall. The countries initially gave significantly high feed-in-tariffs for generating power from solar technology.

Germany has been the leader in solar installations ever since it started giving high feed-in-tariff in 2004. By 2010, Germany accounted for 43 per cent of cumulative installed solar photovoltaic capacity, followed by Spain (10 per cent), Japan (nine per cent) and Italy (nine per cent). Till 2008, Germany had accounted for almost 50 per cent of the global demand for solar photovoltaic. Spain, which started giving feed-in-tariffs in 2006, has also been a big market. So has been Italy.

Rajasthan imports modules from the US for a project under JNNSM. With overproduction and bulging solar power purchase bills, European governments started backtracking on their supportive policies for their manufacturers. Spain was the worst hit. Its government announced complete moratorium on support to solar projects. “Initially, when Spain had announced high feed-in-tariff for solar power, it had budgeted for 600 Mw capacity. However, plants for 2,600 Mw were set up. The country simply did not have the cash to support such a mega scheme,” says a manufacturer who did not want to be named.

No wonder, the prices of solar equipment plunged between 2008 and 2011. Photovoltaic modules cost 60 per cent less, estimates Bloomberg. Other estimates point to a greater decline. The price of polysilicon, the basic building block for polycrystalline solar cells and modules, has fallen from $500 per kg in 2008 to $25 per kg now.

This sharp fall in prices made governments wary of paying high feed-in-tariffs. “Moves by Spain and the Czech Republic to make retroactive cuts in feed-in- tariffs for the already operating photovoltaic projects damaged investors’ confidence,” states the report Global Trends in Renewable Energy Investment 2011 prepared by Bloomberg and the United Nations Environment Programme. “Other governments, like those of Germany and Italy, announced reduction in tariff for new projects—the logical step after a fall in technology cost. What caused concern was the fear that governments facing economic hardship may go back on the previously promised deals for the existing projects, damaging returns for equity investors and banks,” it adds.

No demand in India
The JNNSM provided the policy backing for domestic content for projects under the mission. In the first batch of the mission’s first phase, solar photovoltaic modules based on crystalline technology had to be sourced locally. In the second batch, both crystalline cells and modules manufactured in India had to be used.

The domestic demand did not cover the more contemporary and low-cost thin-film solar modules. MNRE allowed free import of thin-film modules on the ground that India had only one thin-film module producer—Moser Baer. The competition in JNNSM has, therefore, been between imported thin-film technology and domestically assembled crystalline silicon modules. But the competition has been far from fair.

Technology choice for projects under JNNSM has been heavily skewed in favour of thin-film modules which were cheaper. But the cost-benefit is neutralised because thin-film modules are less efficient. More thin-film modules are required to generate the same amount of electricity. This increases the demand for land. Almost 60 per cent of the projects under JNNSM’s first phase have opted for imported thin-film modules. Only 14 per cent of the modules produced globally are thin- film.

Also, in state programmes like the Gujarat solar policy, that aimed to achieve 500 Mw by 2014 but has already achieved its objective, it is not mandatory for project developers to buy equipment made in India. The developers prefer to import equipment from China and the US as they are cheap. Charanka Solar Park in Gujarat, Asia’s biggest with 214 MW operational capacity, has equipment mostly from the US and Chinese manufacturers like MEMC, Suntech Power and CSun. Moser Baer plants in Kamalpur and Zenabad in Gujarat have equipment from LDK, Trina and other Chinese companies, not from the company’s Indian manufacturing plant. Reliance Power’s 40 Mw photovoltaic project in Rajasthan uses modules from First Solar, a US company. “Given the present state, how can domestic content requirement hold? Developers take solace in importing,” says Krishnappa Subramanya, former CEO of Tata BP Solar and now an independent consultant.

Only those Indian project developers who also make solar equipment buy equipment from their own plants. Tata Power’s 25-Mw plant in Gujarat installs in-house Tata BP modules. Lanco Solar’s 35-Mw plant in Rajasthan also installs self-manufactured modules.

Dormant industry
Despite efficient solar manufacturing, “only about 20 per cent of the manufacturing capacity in the country is operational,” says Rahul Gupta, managing director of Indosolar. The rest is dormant as there is not enough demand for Indian cells and modules, he adds. His own state-of-the-art plant in Greater Noida, which has two manufacturing lines of 90 MW capacity each, and another line of 200 Mw that was still being set up, closed in September 2011.

The company retrenched 170 staff, mostly engineers. Indosolar had made a combined investment of Rs 1,200-1,300 crore. The company’s last year’s balance sheet shows it lost about Rs 200 crore due to forced closure. “In 2010, what we produced in the morning was off to airport by the afternoon. Today, we don’t have clients,” says Gupta. The company lost clients in France, Lithuania, Italy, Hungary, Spain and Greece.

This is no isolated case. Maharishi Solar and Tata BP have similar stories to tell. Of the three Tata BP production lines, only one is working. The company had to remove more than 200 workers because of lack of demand. “India has lost the manufacturing plot. Very little of manufacturing capacity established in the country is operational,” says Subramanya. Eighty per cent of the Indian manufacturers are now negotiating loan repayment plans with banks because they do not have the money to clear the dues. Debt restructuring is often seen as a precursor to bankruptcy.

Industry is on the verge of collapse. The solar power sector has turned into a purely import business.

Dumping ground
There is enough evidence that China, Taiwan, Malaysia and the US sell solar modules in India at rates much cheaper than in their own countries. The rates are lower than even the production cost. Anywhere in the world, the production cost of solar cells and modules stands between US 95 cents and $1 per watt-peak. But foreign firms, mostly from the US and China, sell the cells and modules in India between US 65 cents and US 80 cents per watt-peak.

Obviously, these foreign companies are also suffering huge losses. Chinese manufacturer LDK lost $600 million last year. First Solar, a US company, wiped out a billion dollars in losses in the last two quarters.

According to Bloomberg, China produces over half of the photovoltaic modules used globally and is home to many of the biggest brands. In 2001, China held only one per cent of the global market. In 2010, 55 per cent of the modules worldwide were produced by Chinese companies, 13 per cent by companies based in Europe, 18 per cent by the US companies and 13 per cent by Japanese firms. At present, four of the world’s top five cell manufacturers are Chinese, so are three of the world’s five largest module manufacturers.

The US share has fallen from 27 per cent in 2001 to just five per cent now. More than 20 companies globally have either shut down or filed for bankruptcy. In 2011, at least six US companies filed for bankruptcy. Abound Solar, a US firm that has been the supplier for many projects under JNNSM, is the latest to file for bankruptcy. The companies operating at present, including the Chinese ones, have seen a sharp drop in their share prices. In some cases, it is as much as 97 per cent. Business is tough. But what makes the Chinese survive?

“They get strong government support. Among other benefits, the manufacturers get huge export credits, cheap loans and cheap land from the government. The country does not even use its own modules. China produces 32 times more modules than the Chinese market needs,” adds Gupta. This has led to a global trade war.